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iFOREX Daily - January 12, 2012

Sophie J. Fletcher | 08:00 | 12/01/12

The U.S. Dollar strengthened against the majority of its peers as investors sought safety in the face of what could be more trouble for the Euro region.

The U.S. Dollar strengthened against the majority of its peers as investors sought safety in the face of what could be more trouble for the Euro region. The increase came after the Fitch Ratings agency suggested that the European Central Bank boost bond purchasing in order to prevent the demise of the shared currency. Data reports indicating that Germany’s GDP contracted, which weighed on investors as they grew concerned that the biggest economy in the E.U. could fall into a recession. In the U.S., the Federal Reserve revealed that the Beige Book survey indicated that the economy expanded during the last month of 2011 despite a stagnant housing sector and only a slight improvement in unemployment. Data releases showed that MBA Mortgage Applications rose to 4.5 percent. Meanwhile, the Canadian dollar fell for the first time in three days as demand for refuge caused the U.S. currency to climb; this happened amid worries that the sovereign debt crisis is worsening. The Loonie declined against the majority of its counterparts on forecasts that France’s credit rating would be reduced, even though the French Finance Minister never received notification of such of such a move.

The Euro’s rally to the upside concluded as a number of factors caused it to drop to the lowest rate versus the U.S. Dollar in 16 months. Fitch Ratings agency stated that there could be a “cataclysmic collapse” if the European Central Bank doesn’t increase its bond purchasing program. Also, economic reports revealed that Germany’s GDP fell in the last quarter of 2011, fueling concerns that the crisis in the region is spreading rapidly. Furthermore, leaders of Parliament objected to a proposed German fiscal treaty as they thought it would bypass important checks and balances set by the E.U. Other reports showed that the British Pound declined against the greenback after metrics revealed the country’s trade deficit rose more than anticipated. Furthermore, Retail Store inflation declined, spurring speculations the Bank of England may need to implement stimuli to boost economic growth.

The Yen climbed against most of its peers as risk aversion reigned in the market, but dropped against the U.S. Dollar. The Japanese currency advanced against the Sterling in anticipation of the Bank of England’s rate decision as well as poor data that resurfaced concerns over the country’s economy.

Lastly, the New Zealand Dollar recovered from previous losses and traded at a two-month high after American stocks rebounded. The Kiwi climbed as the Federal Reserve said the U.S. economy expanded “at a modest to moderate pace” in its Beige Book Survey.

EUR/USD- Euro Trades At 16-Month Low

As investors no longer needed to cover their short positions, the Euro’s rally came to a screeching halt. However, this was not the only catalyst for the currency’s weakness. The latest data from the ECB showed that the region’s banks are still making record deposits, indicating they’re still not lending to each other. The 17-nation currency was further weighed down as market participants speculated the ECB would not announce new measures when it meets today, and the crisis will continue to worsen. On the data front, the German economy contracted 0.25 percent in the last quarter of 2011, fueling concerns it may be close to entering into a recession. On a more positive note, the Italian budget deficit dropped to 2.7 percent, which could mean good news for the bond auction.

GBP/USD- Trade Deficit Widens

The British Pound declined to a three-month low against the U.S. Dollar after government data showed the trade deficit expanded more than expected, increasing predictions the Bank of England may have to implement further stimuli to boost the economy. The Pound slipped against all of its counterparts as the British Retail Consortium announced that retail shop inflation dropped to a 16-month low in the last month of 2011. According to figures, the trade deficit expanded to 8.64 billion Pounds in November as exports slumped 1.5 percent and imports increased 1.1 percent.

USD/CAD- Loonie Drops On Added Concerns

The Canadian Dollar fell for the first time in three days as risk aversion dominated market sentiment amid worries the E.U. crisis is taking a turn for the worst. The Loonie weakened against 10 of its counterparts on speculations France’s credit will be downgraded, and as crude oil, its main export, declined in price.

USD/JPY- Yen Benefits From Risk Aversion

The Yen fell against the U.S. Dollar as appetite for high yield currencies tapered off on fears the crisis in the Euro region is worsening. On the economic front, reports showed that the Leading Index and Coincident Indexes printed as anticipated. The first one rose to 92.9 and the latter one declined to 90.3.

Today’s Outlook

Today’s economic calendar shows that the E.U. will report on French and German CPI, as well as Industrial Production and the ECB’s Interest Rate Decision. The U.K. will announce Industrial and Manufacturing Production. The Bank of England will issue its Interest Rate Decision. The U.S. will release data on Initial and Continuing Jobless Claims, Retail Sales, Core Retail Sales and the Federal Budget Balance.